Bank of America’s Moynihan urges focus on “contagion risk,” not breakups

By Reuters Staff
January 13, 2010

CHARLOTTE, North Carolina, Jan 13 (Reuters) – Bank of America Corp Chief Executive Brian Moynihan said on Wednesday banking regulation needs to focus more closely on limiting “contagion risk” between financial firms, rather than breaking up the biggest U.S. banks.

Moynihan called for broader changes in banking industry regulation — from accounting rules to leverage and capital requirements — to shore up a system that he said created a mix of combustible elements during the crisis.

“That starts with recognizing that ‘interconnectedness’ and not ‘bigness’ is what led to the need for taxpayer bailouts,” Moynihan said in testimony prepared for his appearance before the Financial Crisis Inquiry Commission, a 10-member panel formed by the U.S. Congress to examine the causes of the financial meltdown.

“We need to consider the downside of debilitating larger financial firms, by requiring them to shed economies of scale or permitting them to service only part of a corporate customer’s needs,” he said.

The commission is holding its first public hearing on Wednesday and is set to hear from executives at Morgan Stanley, Goldman Sachs and JPMorgan Chase & Co.

Moynihan cautioned that the notion that the size of banks led to the crisis was incorrect.

The Bank of America CEO said rather the complex financial relationships of firms like AIG and Fannie Mae and Freddie Mac, and the high levels of leverage used at many firms, were the root causes for the financial crisis that crested in fall 2008.

The remarks were Moynihan’s first on Capitol Hill as Bank of America CEO. He replaced predecessor Kenneth Lewis on Jan 1.

Bank of America received $45 billion in U.S. government aid under the Troubled Asset Relief program, in two series of investments. The second round of investment was made as part of the bank’s deal to purchase ailing investment bank Merrill Lynch & Co. The bank repaid the aid in full on Dec. 9.

The banking industry has been under seige since the bailouts, facing anger over multi-billion dollar bonus pools so soon after taxpayer rescues.

(Reporting by Joe Rauch; Editing by Andrea Ricci)

((joe.rauch@thomsonreuters.com; +1 704 692 5885; Reuters Messaging: joe.rauch.reuters.com@reuters.net )

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